Monday, June 30, 2014

RUI, RUT and IJE Exhaustion Analysis, Rate of Change vs. Price (Part 4)

This post was originally on the Dvolatility Research blog on 6/30/2014.

Finally, to close out the Russell index series, I'm going to compare the 52-week rates-of-change of RUI, RUT and IJE since 2005. I think the rate-of-change (ROC) momentum indicator can be used as a good exhaustion indicator.

RUI, RUT and IJE: 52 Week Rate-of-Change (ROC) vs. Price

Today, divergences between Russell index prices and ROCs look similar to the ones that occurred when the market was topping out in 2007. 52 week ROCs aren't as low as they were in 2007, but falling rates-of-change combined with divergences are telling me that the stock market is exhausted and at risk of a major correction in the near-term. And if the market corrects here, 52 week ROCs could easily test zero or go negative with force, which usually means prices have entered a bear market (especially in a 5+ year old bull market)

In the chart below, The Russell Microcap Index (IJE) has the most bearish rate-of-change and the Russell 1000 Index (RUI) (large-cap) has the most bearish divergence. This is not a healthy condition for the overall market.

Source: StockCharts.com

The Russell indexes also have divergences and falling ROCs on a 12, 24 and 36-week timeframe.

RUI (large-caps) vs. 12, 24 and 36-Week Rate-of-Change

Source: StockCharts.com

RUT (small-caps) vs. 12, 24 and 36-Week Rate-of-Change

RUT's 12-week ROC looks noisy, but its 24 and 36 week ROCs are currently diverging its price. Its 24-week rate-of-change pierced through the zero line recently and is currently at 1.85%. The last time it pierced through the zero line was in 2011 right before a major correction occurred. RUT's 36-week rate-of-change trend looks similar, but is slightly higher at 6.42%.

Source: StockCharts.com

IJE (micro-caps) vs. 12, 24 and 36-Week Rate-of-Change

IJE's 24-week rate-of-change is currently at -2.01% and the index's price looks like it is making a head and shoulers top. IJE's 36-week rate-of-change is plunging but still above zero at 6.73%.

Source: StockCharts.com
This concludes my analysis on the Russell indexes. To catch up on the rest of the series, read parts 1, 2, and 3.

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